A new research report to be published this week by the influential Institute of Economic Affairs (IEA), “highlights the flawed thinking behind imposing new controls on the private rental market”.
The report concludes that “home seekers would face higher rents and restricted choice if tenancy rent controls were introduced in the UK.”
IEA thinks that “policymakers should instead look to radically shake up planning laws in order to facilitate more private rented accommodation and improve individual wellbeing through increased affordability.”
The Institute of Economic Affairs (IEA) is a free market think tank founded in 1955, its stated mission is “to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.”
Labour’s idea that capping rent increases across the UK will help provide more affordable housing is “flawed thinking” says IEA. Any form of rent control will not only reduce private investment in housing and push up rents long-term; it will lead to dilapidation of the rental property stock. It will also lead to lack of labour mobility as people stop moving home because of the perceived benefit of a lower rent later in the tenancy, they say.
Alarmingly, Labour’s plan to end excessive rent increases announced as Labour policy in April bears a striking resemblance to François Hollande’s socialist party policy in France. His rent control scheme was due to be implemented in March 2014, but has since been abandoned as unworkable in the short term.
The French Government, which has a similar housing shortage to the UK, has since acknowledged that to implement such a scheme would involve so much technical complexity, particularly collecting data on rents across the country, that a successful implementation could not be possible for months or even years.
Under Labour’s proposals, landlords would be free to set rent levels at the beginning of the contract, but would then be subject to a cap in increases throughout what Labour are proposing will be a minimum 3-year contract.
This, the IEA has said, would lead to inflated rents at the start of tenancies to compensate landlord’s for their inability to raise rents in subsequent years. “Tenancy rent controls would not be welfare enhancing and are, if anything, likely to increase the cost of living,” “The fact that beneficiaries are obvious and well-organised whilst those who suffer are dispersed would make this a potentially damaging policy, which could be very difficult to reverse.”
The study questions claims that individuals suffer from a lack of security of tenure in the private rented sector. “Secure tenancies are provided by the market for those willing to pay for them.”
The UK private rented sector’s (PRS) share of the total housing stock has grown dramatically after a severe decline having been the subject of draconian rent controls between 1915 and 1989. Only since the removal of these controls with the introduction of the 1988 Housing Act and the Assured Shorthold Teancy (AST) has the industry improved, with private renting now accounting for over 16% of the housing stock in 2013, up from 10% in the late 1980s and early 90s.
With now around 1.3 million households in the UK renting from private landlords, says the report, “the sector is in desperate need of policies that will stimulate desirable rentable accommodation at an affordable price. A lack of new property development continues to push up the cost of rent and Labour’s plans will only make things worse. Liberalising planning laws, in contrast, would enable the supply of rentable property to catch up with increasing demand, bringing down the cost of rent.”
The IEA says that the German experience with rent controls, where similar restrictions exist with some success, should not be used to justify bringing in rent controls in the UK. Germany’s ability to increase housing supply in the face of rising demand means that rents are much more affordable than in the UK, and have become increasingly affordable since 1980.
Problems Rent Controls would bring:
Despite claims from politicians, says the IEA, controls will not improve the affordability of renting, other than in the very short term. “These controls are likely to push up rents, due to greater uncertainty over future regulation and the risk to landlords associated with increased security of tenure.”
Security of tenure, says IEA, “is not a major consideration for the majority of those groups dominating the private rental market, namely young people, students and more mobile households. Over 35% of private renters remained in residencies for less than a year in 2013. Because rents will be initially higher, fixed term tenancies would allow less mobile households to enjoy low rents at the expense of the more mobile – harming labour mobility.”
The IEA says that experience has shown that “While previous forms of rent controls were ultimately unsustainable due to their shortcomings, rent regulations such as these would prove extremely difficult to reverse. Statutory bodies that support the policy would have a vested interest in its maintenance and tenant lobby groups would gain the upper hand over small landlords, young people and mobile households.”
Commenting on the research, Mark Littlewood, Director General at the Institute of Economic Affairs said:
“It is absurd that households across the UK have to pay such a large proportion of their monthly income on rent. But imposing rent controls on the market will do nothing to improve affordability, and will simply result in a number of perverse incentives that will harm those very individuals which such a policy sets out to protect.”
“The government needs to wake up to the fact that only through increasing the supply of rented accommodation can we really address the problems of high rents and poor tenancy security. If we are serious about helping the most vulnerable in society, we need to radically liberalise planning laws so we can build more houses.”
The IEA www.iea.org.uk is a registered educational charity and independent of all political parties.
— LandlordZONE (@LandlordZONE) September 9, 2014